- Levi’s is grappling with many of the pressures seen across apparel retail, including economic volatility and soft consumer demand, but its 43% inventory growth in the third quarter stood out to many analysts.
- A third of the year-over-year surge was due to inflation and a rise from 2021’s “abnormally low inventory level,” another third from early orders to defend against supply chain troubles, and the final third from “an increase of goods in transit,” CFO Harmit Singh told analysts on a Friday conference call, per a Seeking Alpha transcript.
- To clear inventory, the denim maker cut its Q1 receipts by 25% and will institute heavier markdowns, and it expects levels to normalize by the second quarter next year, Singh said.
In reporting higher inventory levels, steeper costs and a tough consumer environment, Levi’s third quarter results mirrored other retailers and brands, but its inventory trouble appears to be worse than many others, according to Morgan Stanley analysts led by Alex Straton.
This massive inventory surge at Levi’s follows smaller yet still significant growth earlier in the year, with increases of 29% in the second quarter and 20% in the first. The pressure for markdowns is also coming from outside the company, as rival brands slash prices to attract wary consumers and clear their own stockpiles.
Net revenue in the third period rose 1% year over year to $1.5 billion, as wholesale revenue rose 1%, according to a company press release. Global digital net revenue grew 9% and was 21% of net revenue. Gross margin contracted by 60 basis points year over year to 56.9%. Net income declined 11% to $173 million, the company said.
Executives said they expect the promotional environment in apparel retail to intensify as the holidays ramp up, but CEO Chip Bergh told analysts that the company won’t let its need to cut prices interfere with its brand.
“At the end of the day, we are about strength of our brand, and an overly promotional ... brand is not good for brand integrity,” he said. “And so, we're going to do our best to protect gross margin without being uncompetitive in the marketplace.”